SWFs as Market Saviors…Again

Ashby Monk

Dr. Alexander Mirtchev, who is the Independent Director of Kazakhstan’s SWF Samruk-Kazyna, argued over the weekend that SWFs could be saviors of the West and the global financial system:

“…SWFs are starting to look increasingly as the premier source of available financing for a cash-starved international financial system…SWFs could become increasingly accepted as investors in the US and Europe, as the spending capacity of Western governments remains constrained by the need to cut bulging budget deficits.”

I’m having a flashback to 2007. At that time, the financial crisis was picking up steam, and there was a widespread expectation that SWFs would step in and save cash-starved financial services firms. However, three years later, we know that was just a pipe dream. The crisis was simply too big and SWFs too small for them to ‘save the world’, as it were. More to the point, SWFs weren’t in the business of bailing out financial services firms. They were in the business of making profits. So, when the full extent of the financial crisis became apparent, SWFs retreated and left the West to sort itself out.

Anyway, let’s fast forward to 2010. Mirtchev is resurrecting the old argument about SWFs acting as market saviors:

“The Gulf SWFs can underwrite the autonomy of states by acting as an insurer of last resort – in other words, a buffer against global crises and cyclical development.”

It’s hard to know exactly what he is getting at here, because the article only gives us a series of quotations out of context. Nonetheless, I think he is arguing that SWFs could be ‘insurers of last resort’ for the global economy, writ large.

Now, I myself have argued (here) that SWFs can act as a “buffer against the risks to autonomy and sovereignty in a global economy.” But there is a fundamental difference in my argument from his: I see SWFs as insurers of last resort for the nation-state sponsor, while he seems to see them as potential saviors of the entire economic system during the upcoming period of fiscal austerity.

As I see it, the problem with the latter argument is simple: the profit motive. As we learned in 2007, SWFs aren’t in the business of bailing out foreign firms, industries or countries. They need to make returns so that they can fulfill their primary, domestic objectives. As I note in my paper,

“SWFs are conceived to be a desirable bulwark against the depredations occasioned by globalization—a means of protecting nation-state institutions and commitments from the economic and financial imperatives that drive the discounting of those institutions and commitments.”

And I stand by that analysis. In my opinion, SWFs exist to preserve the autonomy of the state that sponsors the SWF. But I don’t see SWFs acting as insurers of last resort for the foreign firms or countries in their portfolios.

In short, Mirtchev is right that SWFs will have plenty of opportunities for investment in Western markets desperate for capital. But if things get really bad, I’d expect SWFs to retreat (again) and go into capital preservation mode.

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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